As you may recall, I reviewed AT&T earlier this year and concluded that I needed to sell it, because it was no longer a dividend-growth company. And in July, I did sell it, grabbing one last dividend on my way out the door.

These articles discussed my analysis and sale of AT&T:

Since I sold it, AT&T has continued to be in the news – investors have been tracking its progress toward spinning off its media assets, and they’ve also been watching with interest as its price has inexorably slid down and down, creating more of a possible value bargain.

This article will bring you up to date on where AT&T is as a company and as a possible investment.

AT&T’s Reorganization and Spinoff of Media Assets

The whole thing started with AT&T’s (T) surprise announcement in May that it was going to spin off its media assets into a new separate company.

As investors and analysts studied the announcement and AT&T’s projection of financials, they concluded that AT&T’s dividend would end up being cut by about 40% when the spinoff is completed next year.

The spinoff amounted to a 180-degree strategic change, because AT&T had spent the previous several years assembling media and entertainment assets, such as DirecTV and Time-Warner, in an effort to become a content + distribution powerhouse.

The new arrangement undoes that strategy. It appears that AT&T’s management has accepted the mistake in acquiring the media assets, and it is now trying to unlock their value through a spinoff, while it goes back to being a telecom company.

Here is the plan in a nutshell.

What does that diagram mean?

  1. AT&T shareholders will retain 100% of AT&T after the spinoff.
  2. AT&T, however, will no longer own its media assets, as WarnerMedia is being transferred into New Company. AT&T reverts back to being a telecom company.
  3. The New Company (still not named) will own all of WarnerMedia + all of Discovery (DISCA), which is AT&T’s partner in the grand plan.
  4. AT&T is unloading $43 B in debt to New Company.
  5. AT&T shareholders will receive shares in 71% of New Company. Note that this does not mean that AT&T owns 71% of the New Company; its shareholders do. This important distinction is often mis-reported.
  6. Discovery shareholders will own 29% of New Company.

In its announcement, AT&T proclaimed that New Company will be a “global entertainment leader.” It says that it will accomplish this by:

  • Unlocking significant value by getting the WarnerMedia assets out of AT&T and into a media-savvy company.
  • Accelerating the global growth plans of the streaming services HBO Max and Discovery+, supported by what will become one of the deepest content libraries in the world.

  • Generating $3B+/year in cost-saving synergies that can be reinvested into content and streaming.

The transaction is expected to close in mid-2022. When it is completed, here’s what we’ll have:

AT&T, shorn of the WarnerMedia assets, will go back to being what it was before it began collecting the media assets: A telecom company. A comparison might fairly be made to Verizon (VZ) in that regard.

New Company will own all of the WarnerMedia assets coming from AT&T as well as all the Discovery assets. It will also become responsible for $43 B of debt coming off the books at AT&T.

The CEO of New Company will be David Zaslav, who is the current CEO of Discovery. He says that New Company will have robust free cash flow to support paying down the debt, reinvestment, and financial flexibility.

AT&T’s current shareholders will own 100% of the “new” AT&T, as well as 71% of New Company. Note that the latter means that they also still own 71% of that transferred debt.

Upon completion, AT&T shareholders will receive shares in New Company under a formula that has yet to be announced.

What Has Happened Since AT&T’s Announcement

While I found it easy to make the call to sell out of AT&T after it fell from the ranks of dividend-growth companies, many investors wonder about holding on and seeing how the two new companies shake out.

AT&T’s CEO John Stankey, at its recent 3rd Quarter Earnings Presentation, painted a rosy picture:

This marks the fifth consecutive quarter of consistent progress since we articulated our simplified business strategy. … The last five quarters have been a period of repositioning our business while also delivering operational results. With that repositioning nearing completion, that will afford even more focus on continued execution and improved performance. (Source)

While that may sound enticing, the market has not liked what AT&T is planning to do. The stock’s price has fallen more than 20% since the May announcement (purple line on the following graph). That has caused its yield to rise to a stratospheric 8.2% (orange line).

Regarding that high yield, however, remember that AT&T’s actual dividend amount is frozen now, and it will inevitably drop when the spinoff is complete. The consensus is that the drop will be about 40%, from its current level of $2.08 per share annually to around $1.25.

It seems unlikely that New Company will pay a dividend, at least at first. It will have re-organization and integration challenges to deal with, not to mention a boatload of debt. And for context, Discovery (already a media company with about an average amount of debt) paid no dividend.

So the investing proposition if one hangs on to or buys AT&T shares is that you end up with:

  • A pure-play telecommunications company, with modest growth prospects (low single digits), paying perhaps a 4-4.5% yield.
  • 71% of a pure-play media company with good growth prospects, highly indebted, paying no dividend.

From reading articles and blogs, I think it’s fair to say that investors’ reactions have divided into two camps:

The bullish camp says that the restructuring will indeed unlock the value of AT&T’s media assets. Most observers agree that AT&T had no idea how to manage creative media assets, and that the strategy to combine content + distribution under one roof was questionable to begin with.

The result for AT&T shareholders, according to the bulls, will be that they own all of the “traditional” AT&T, which can now focus on its core telecom and broadband services, plus 71% of an exciting new media company run by people that understand how to run media companies and compete in streaming.

Some go so far in stating the bullish thesis that it comes out that AT&T shareholders end up with a good-yielding pure-play telecom company (the new AT&T) plus a high-end media company (New Company) “for free.”

At the other end of the scale, naysayers focus mostly on the dividend cut and on AT&T’s pitiful market performance since the announcement. They believe that many (if not most) retail investors owned AT&T for steady, high-yield dividend payouts that rose slowly each year. They weren’t buying into a growth story, were not helped by AT&T’s forays into media (which were overpriced and mismanaged), and won’t be helped much by New Company’s accomplishments, whatever they may be.

The bearish view is summed up by this passage from an article in the Washington Post:

AT&T’s latest reinvention … is bad news for many retail shareholders. The company has long paid a generous dividend, attracting legions of mom-and-pop investors seeking dependable retirement payouts.

But shedding WarnerMedia will shrink annual dividends by nearly half, from about $15 billion to between roughly $8 billion and $8.6 billion, the company said.

AT&T shareholders will own 71 percent of [New Company], so they will benefit from its future growth. But many current AT&T investors didn’t sign up for … a media growth stock. They want reliable income.

How Should You Think About AT&T Today?

In my first article on AT&T after the May announcement, I recommended that AT&T holders should base their decision on what kind of investor they are:

  • What are your goals, strategies, and tactics for investing?
  • What are you trying to accomplish?

As far as I’m concerned, those are still the basic considerations, because I always believe in investing with your goals in mind. Someone else’s idea of a bullish situation may not apply to you, just as your idea of good investing outcomes may strike some others as foolish.

Because I am primarily a dividend-growth investor, I sold AT&T. It didn’t fit my long-term goals with its frozen dividend and impending dividend cut. Expecting any dividends from New Company struck me as speculative at best. It still does.

Of course, not every investor is as dividend-growth-centric as I am. Indeed, some investors have hybrid goals. “Growth and Income” is a time-honored investment category, well-established over the years as a best-of-both-worlds objective.

This illustration shows how such a hybrid approach fits into a spectrum of investing goals.


Most of the time, Growth & Income objectives are illustrated by portfolios that mix stocks and bonds, as shown on the display.

But the objective is also illustrated by the choice for potential AT&T investors. You could view an investment in AT&T now as providing:

  • High-yield income currently (over 8% yield).
  • Long-term income from the new AT&T that is more typical for a telecom company (4-5%).
  • Potential growth from the new media company that will emerge next year.

In other words, Growth & Income.

The takeaway if you want this combination of investment results would be to continue to hold AT&T if you already own it, or buy it now as a deep-value opportunity if you feel that the price drop since May has been overdone.

Risks and Questions

Arguments can be made that the fundamentals of “core AT&T” and New Company are both strong, and hence the big decline in the stock’s price since the reorganization was announced are not warranted.

However, let’s explore the most important risks pertaining to that view.

  1. High debt

One concern is AT&T’s debt load.

Here is AT&T’s debt-to-capital (on the left) compared to Verizon’s (on the right.

High debt is not unknown for a telecom, which is a capital-intensive business. I usually think of “acceptable” debt for most companies as 50% of total capital, and AT&T’s debt runs right about at that level. Verizon’s is higher. Verizon has a better credit rating at BBB+ to AT&T’s BBB. Both of those are low-investment-grade ratings.

Each of those debt graphs tell individual stories about the companies. AT&T’s graph shows debt going up and down over the years, as it made acquisitions, then tried to pay down the debt, then made more acquisitions. Verizon’s story is that they spent huge in 2014 to obtain 100% of its wireless business, followed by six years of steadily decreasing debt.

Common to both of their stories is that every so often, they participate in spectrum auctions, where billions of dollars might be spent all at once. Earlier this year, AT&T spent $23 B+ on “C-band” spectrum necessary to support new, faster 5-G networks. Verizon spent $45 B at the same auction, and you can see that its debt-to-capital ratio went up.

While $43 B of AT&T’s debt will be transferred to New Company, AT&T shareholders will own 71% of that company after the spinoff, so they still own most of the debt. High debt mitigates against dividend increases, because debt competes with dividends for the company’s cash flow.

  1. Uncertainties surrounding the spinoff

The spinoff and creation of New Company are complex undertakings. Unexpected costs (like severance packages) may amount to more than is being planned for.

Once completed, there will still be a lot of uncertainties, and I wouldn’t be surprised for it to take a year or two for the two companies to settle into what might be called normal operations. As Morningstar puts it, AT&T’s financials are “…set amid financial complexity as management deconstructs the firm’s former strategy.”

Discovery’s management is going to have tremendous new assets – the WarnerMedia content library – to work with. Will they be able to maximize the value? That is kind of being taken for granted in some circles, but it’s really not known. Media content and distribution (including streaming) are complex and intensely competitive businesses.

The new AT&T’s communications business is probably more predictable, although the company’s management over the past decade has a poor record of setting a course and sticking to it. Who knows whether they will do the expected things? I find it less than reassuring that CEO John Stankey said in the company’s recent earnings call, “We haven’t given specific guidance on the overall communications company yet.”

What is safe to say is that if you like margins of safety in your investments, there aren’t many here, at least in the remaining months running up to the spinoff, and then in the first year or two afterwards. I think that the risks of some things going wrong, and/or pro-forma projections being wildly inaccurate, are high.

  1. How good is “new AT&T”?

After the spinoff, AT&T will be a telecom company. We can model that by looking at its telecom segments now, and making comparisons to Verizon.

Trefis thinks that about 70% of AT&T’s market value comes from AT&T’s Communications segment, which is basically what the new AT&T will be after the spinoff.

70% of the company’s current market cap is $126 B. For comparison, Verizon’s market cap is $219 B. Perhaps surprisingly, Verizon will be a significantly larger company than AT&T after the spinoff. Or maybe this just means that AT&T is vastly undervalued now.

In its most recent earnings report and conference call, AT&T’s executives did their best to portray AT&T’s core businesses as strong and growing. For example, here is a slide they used to show solid growth in three key areas.

The results on the postpaid phone subscribers are definitely good. The company’s wireless business has 66.4 million postpaid subscribers, or almost 5% more than a year ago. And the churn rate is low, which is obviously a good thing in a subscription-like business model.

That said, all you have to do is watch a bunch of AT&T’s TV commercials to get a sense of the massive cost of constantly advertising cellphone services and deals to understand how competitive the business is. And that continuing cost, in turn, implies that it is difficult to keep margins very high. AT&T’s latest approach, which is hard to miss, centers on offering consistent, easy-to-understand plans to both new and existing customers.

Fiber subscribers are also up, 21% more than a year ago, and in the most recent quarter AT&T added the most gross customers ever.  This business has less consistent growth, as net adds were 20% fewer than in the year-ago quarter. Growth here is important, as it has been estimated that every 1.5 million subscribers adds around $1 billion in annual revenue. The company says that 70% of fiber net adds are new AT&T broadband customers.

I crossed out the HBO Max results, because they don’t count here, as that business will move to New Company next year.

Another part of the “new” AT&T will be its wireline business for consumers and businesses. Not surprisingly, these segments are stagnant at best. They don’t display the growth available in Mobility.

As stated earlier, while AT&T’s communications business may look somewhat predictable, with management focused directly on it, there is no guarantee that that is what will actually happen.

Management offers reasons for hope. At its recent Q3 Earnings call, CEO John Stankey offered these comments on the core telecom business:

[T]here’ll be fewer moving parts to assess and better visibility and clarity. In the meantime, it’s important not to lose sight of the success we’re having, deploying capital into our areas of strategic focus. Bottom line, we’re accelerating our historical rates of customer growth in Mobility [and] Fiber, … and customer satisfaction is improving across the board with lower churn. … Our Fiber products are recognized as best-in-class. As we expand our Fiber footprint, we’re delivering a superior service, and we’re growing our share. …

And we feel really good about it, our customers are growing, our revenues are growing, and we continue to take costs out of the business. So over time, it’s going to translate to improvement in, not only top line, but we will see profit growth.

Overall, analysts covering AT&T expect slow EPS growth per this information from FastGraphs.

  1. Has AT&T become a deep value play?

The relentless price decline in AT&T stock, most recently accented by a sell-off in October, has produced an increase in pro-value arguments for buying or owning it. The low price improves AT&T’s risk profile.

But what is the correct price for the “new” AT&T? This chart shows AT&T’s and Verizon’s valuations (Price/Earnings ratios) over the past 10 years.

You can see that the market has generally valued these two telecom companies with PEs in the 9-10 range most of the time. With AT&T’s earnings for 2022 estimated at $3.21 per the FastGraph shown earlier, that suggests a price of $30 or so for AT&T’s shares.

Compared to AT&T’s current price of about $25, that suggests that the stock is undervalued right now. But (speaking for myself), the plethora of uncertainties surrounding the reorganization render such a simple calculation very speculative. While its risk profile may be improved by the recent price drops, there is more guesswork involved in estimating a fair price for AT&T than is normally the case for any stock.

5. Will AT&T resume dividend increases?

Some commentators have said that with the new structure, AT&T will be able to resume annual dividend increases, albeit from the new lower dividend rate that will go into effect next year.

Personally, I don’t see how they can predict that, and anyway, it would take five straight years of such increases to qualify AT&T as a dividend-growth stock again, as far as I am concerned. Five years is the minimum I consider for a stock to be a dividend-growth stock, and thus eligible to purchase for myself.

As an investor, I would be in a prove-it mode when thinking about future dividend increases.

6. How good will the new media company be?

Of course, buying or owning AT&T now means that after the reorganization, you will also own shares of New Company, with WarnerMedia’s assets combined with Discovery’s TV assets.

Under AT&T, the WarnerMedia segment has seen some promising results from its introduction of HBO Max and making HBO (the channel) available on various platforms. Total subscribers are up to 69 million.

Here is the proper place to look at WarnerMedia’s results that I crossed out before.

One thing that’s interesting about these results is the net loss of domestic subscribers from Q2 to Q3 this year. That is presumably the result of trial subscribers not converting their subscriptions at the end of their trial periods as well as AT&T ending the HBO channel’s presence on Amazon’s Fire TV platforms.

That said, as shown here, year-over year shows decent growth.

At their Q3 earnings report, AT&T touted overall subscriber growth and increased revenue from those, but also noted that each launch in a new market (such as Europe or individual countries therein) comes with significant initial costs.

Bottom Line

My bottom line after considering all of the above is that I think the best move on AT&T right now is wait-and-see, unless you have strong convictions about the various things that I have designated as unknowable in this article.

  • It will probably take a few months after the reorganization for the market to find the “right” price level for the stock.
  • Let’s see what the actual debt levels look like once the transactions are completed.
  • Let’s see what they say about the dividend – will they continue paying a dividend straight through the reorganization and the introduction of the “new” AT&T? Will they begin a new annual increase policy?
  • Will management maintain focus on their core business, or start to become distracted by other things?
  • Even if they maintain focus, will the costs of expanding mobility and fiber pressure margins too much? Can they reduce debt in the face of the capital needs (such as spectrum auctions) of running the business?

For bulls, here’s the best case that can be made for buying AT&T now if you have convictions on these propositions:

  • Its price has bottomed at a level at which AT&T is very undervalued.
  • The transitions into the two new companies will go smoothly, with few unanticipated costs or major issues of integration.
  • The “new” AT&T will emerge as a strong, growing, focused telecommunications company.
  • The dividend will be continued throughout the transition.
  • The company will begin to raise the dividend again within, say, one year.
  • New Company will take shape as a profitable growing media company, well-run, and take full advantage of the strong WarnerMedia content library as well as new content development under current development and into the future.
  • New Company’s strategic choices – such as how and when to introduce HBO Max in new countries, and how to most profitably launch new movies (theatrically, streaming, or both) – will be the best choices.

If you believe all or most of these things, it is possible to see AT&T as a good bet now on its own and to regard New Company almost as a freebie growth company thrown in. If you don’t want the growth, you can sell your shares in New Company as soon as you get them.

What does Wall Street say? The left column below shows the various reports provided by E-Trade, while the right column shows those from Schwab. The average of all of them seems to be neutrality.

This is not a recommendation to buy, hold, sell, trim, or add to AT&T (T). Any investment requires your own due diligence. Always be sure to match your stock and fund picks to your personal financial goals.

— Dave Van Knapp

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